From a Gust to a Breeze

As you read this article, the election is over but wind-energy proponents likely still are biting their nails over their own extremely tight race. The fate of a tax credit that kept the wind industry growing throughout the recent recession is set to be decided during the lame-duck 2012 legislative session, and some equipment makers already are preparing for the worst.

The production tax credit provides wind farm owners with a 2.2 cent per kilowatt-hour (kWh)—or $22 per megawatt-­hour (MWh)—credit for the first 10 years a facility operates. Opponents say the incentive, first enacted in 1992 and renewed several times since, has outlived its usefulness and is beginning to have a negative impact on the wholesale electricity market and consumer costs. However, Navigant Consulting estimates 37,000 jobs could be at stake should this financial rug be pulled out from under a manufacturing base that had been growing until last year.

The debate over the tax credit also is raging within the wind industry itself. The board of directors of the American Wind Energy Association (AWEA) voted in September to boot Chicago-based utility Exelon from both the board and the organization because of the company’s public opposition to the wind credit. Exelon has lobbied extensively against the credit in Washington, D.C., despite its ownership of approximately 900 megawatts (MW) of wind-energy resources.

At the heart of Exelon’s opposition is the issue of negative electricity pricing, by which wind producers may be incentivized to pay transmission-grid operators to accept their power during periods of surplus supply. A September report by The NorthBridge Group, a Concord, Mass.-based energy-consulting firm, documents this phenomenon. Wind farm operators receive the tax credit, regardless of whether the grid needs the electricity they are producing or not, so they have flexibility to actually offer to pay the grid operators to take their power and still make a profit. Exelon, among others, says the practice could end up financially threatening generators who don’t benefit from the credit but are forced by the market to match bids that may be lower than their own operational cost.

Wind supporters argue that Exelon and NorthBridge have overstated the impact of negative pricing, citing U.S. Energy Information Administration figures that estimate such conditions occur less than 0.1 percent of the time (versus up to 10 percent, according to NorthBridge figures). They also note that new nuclear plants were granted an $18 per megawatt production tax credit in 2005. Of course, no new nuclear plants have been built during that period to take advantage of this benefit.

The controversy over the tax credit is a side effect of wind’s growing presence in a number of U.S. electricity markets. In fact, 32 percent of total U.S. generating-capacity additions in 2011 came from wind, according “2011 Wind Technologies Market Report,” released in August by the U.S. Department of Energy (DOE). Those additions represented $14 billion in investment, largely driven by the tax incentives, and the report noted that wind now makes up more than 10 percent of total electricity generation in six states and more than 20 percent of generation in two of those (South Dakota and Iowa). So, there are more wind suppliers potentially bidding lower prices into the market.

While wind farm developers are rushing to complete currently active installations before Dec. 31, 2012, turbine manufacturers already have begun layoffs as they plan for the possibility of the credit expiring. Major players Clipper Windpower, Vestas Wind Systems and DMI Industries are among those announcing significant layoffs. These cutbacks come even as U.S. wind farm developers increasingly are turning to U.S.-based equipment manufacturers; 67 percent of the equipment used to construct the wind farms erected in 2011 was sourced from U.S. operations, according to the DOE report.

Exelon’s opposition isn’t difficult to understand, given that the utility holds the nation’s largest nuclear-plant portfolio, and nuclear operators are under increasing ecomonic pressure thanks to the huge effect low natural gas prices are having on the market and on nuclear producers in particular. Dominion Resources announced in October that it would shutter its Kewaunee nuclear power plant in Carlton, Wis., in early 2013, despite receiving a 20-year license renewal in 2011. Company officials could not find a buyer for the plant and said operating expenses made it economically unfeasible to keep it running. The Electric Utility Cost Group has estimated maintenance and fuel costs for up to a quarter of all nuclear reactors is beginning to bump up against what the wholesale electricity market is willing to pay, leaving little to no profit margin for those plant owners.

Over the long run, improved transmission of electricity from wind-rich to wind-poor areas would help alleviate some negative-pricing pressure. With more markets available for bidding, all producers would have access to a wider range of pricing opportunities.